Vol 2 No 1		January 2000

Katt & Company is a fee-only life insurance advising firm. We work with clients throughout the U.S. - primarily by phone, mail, email and telecopy. Typically, we assist clients buying life insurance, those who need existing policies reviewed and managed, and in support of litigation. For references please contact us.

Alerts

(Information about specific life insurance companies is obtained during our work with clients and as such is ad hoc and not based on a systematic analysis of all life insurance companies. Although we believe the information presented is accurate, it is possible that it doesnít apply to all such policies identified because of different ages, ratings or policy structures).

Many states have authorized CPAs to earn various fees and sales commissions. Based on experience during the past year and a December 20, 1999 Wall Street Journal front page story about a Paducah, Kentucky man sold a charitable split dollar scheme that has fallen apart, questions need to be asked of CPAs about whether they will be paid fees or commissions from the sale of financial assets they may be pushing on their clients. Last year I was part of a professional team advising a client about various financial planning issues, including the review of his existing life insurance and possible purchase of new policies. The CPA, who had appeared to be cooperating in my areas of expertise, went behind my back to criticize the options I had presented and pushed his own recommendations. Unknown to me was that this CPA was trying to sell insurance for commissions he would earn. Indeed, one of his criticisms was the low-load, no-commission policy I had recommended. The CPAís advice was obviously self-servicing and the client (an attorney) quickly recognized this, but it took me several additional hours (at $265 per) to straighten out this situation. Had I realized the CPA was little more than a salesman I would have forewarned the client, dealt with the CPA very differently and probably saved my client the additional fees. As I first learned about from the Wall Street Journal, Richard Hancock's CPA recommended a charitable split dollar scheme to him and pushed hard for its purchase. I spoke with Mr. Hancock and he told me he really didnít understand how this program worked, but felt comfortable because his CPA (who he believed was independently representing his interests) was completely for it. What Mr. Hancock didn't know until later was that his CPA earned a commission of about $50,000 because of his purchase. Members of the CPAís firm had attended a seminar about the charitable split dollar scheme and they were apparently hawking it like any other salesmen/women might. It is a shame that the proud CPA profession is, in some jurisdictions, being enticed into giving up its independent fiduciary role advising clients in financial areas in exchange for commission riches that will irrevocably taint their objectivity. But it isnít the commission-motivation that concerns me; it is the failure to explicitly inform clients and others that they are so motivated.

North American Company for Life and Health Insurance - A Classic Survivor UL policy we are managing for a client uses what appears to be a pricing strategy known as lapse-supported pricing. Policies that are lapse-supported have surrender values that are substantially below what the policyís actual asset share is. In the case of the policy we are following, the surrender values are much lower than a policyowner would be entitled to upon surrender for some 15 years. In theory, the losses incurred by policyowners who surrender their policies during the lapse-supported period are shared with persisting policies making them a better value than they otherwise would be. There are two major problems associated with lapse-supported priced policies, both related to the nondisclosure of the fact that the policies are lapse-supported in the first place. And not only is the fact that a policy is lapse-supported not disclosed, but every time I have inquired to a companyís actuary department about such pricing, the company actuaries deny they use lapse-supported pricing. Instead they use convoluted assertions and twisted terminology in an attempt to call it something else. Indeed, North American denies the Classic Survivor policy is lapse-supported. The first major problem is surrendering the policy during the lapse-supported period because significant losses would be suffered. While it may seem obvious that policyowners should not surrender their policies for losses, policyowners donít know about the lapse-supported pricing in the first place and donít have any way of knowing what the surrender values should be. The second problem is that the anticipated good results for persisting policies may turn out to be an illusion either because the company guessed wrong about the number of surrenders needed to produce the extra policy values, or because a company that would do lapse-supported pricing without disclosing or admitting it may also be capable of keeping some of the profits from surrendered policies for company shareholders. (For a detailed explanation of lapse-supported pricing please refer to my November 1994 AAII Journal column.

Tip

It has been my experience that many of the advisors we work with either don't inquire about the health history of potential insureds, or make only a very cursory inquiry without any depth or follow up. Not asking about health history can be easily cured. However, making an inquiry and being told by a client that they are in good health may be very misleading because some clients downplay the significance of their health problems. I recently did work for a client I had originally worked with in 1996. One of my first questions upon being re-engaged was about his health. He said he was still in great health, but I persisted in my questioning and quickly discovered he had two heart attacks in 1997. Because he was still extremely active in his construction business he perceived himself to be in great shape. Misunderstanding a clientís real health status can cause planning problems. Extensive, complicated and expensive planning may be completed assuming that life insurance is available at standard rates only to discover from underwriting that the client cannot qualify for preferred or standard rates. This can cause a good deal of work to be redone and could cause a client to give up on the planning in frustration. I take a detailed history of a clientís health to various insurance company underwriters (on an anonymous basis) to get a good idea of what they are likely to offer and use this as the basis for my reports. For example, if it is likely that a client would qualify for a Table C sub-standard rating I use Table C for my analysis. Another problem associated with a client misunderstanding his/her health status is the surrender of life insurance that was purchased at preferred or standard rates at a time when, because of current health status, the client may not even be insurable. This was about to happen in the example noted above. My client who had two heart attacks in 1997, taking advice received from his CPA, was about to let his preferred rated 10-year level term policy expire (the 10 years was about to be up). Not only was the clientís health significantly worse but he has a very significant liquidity problem so the insurance was needed anyway. I recommended that he convert to a universal life policy with the same preferred rating as allowed under the terms of the policy. As a bonus to this case, because this client lives in California where it is legal to rebate commissions, I arranged for a cooperating agent to rebate most of the commissions earned because of the conversion.

Information

My November 1999 AAII Journal column discusses life insurance that is intended to remain in force until the insured dies, what I refer to as when-I-die life insurance (in contrast to if-I-die life insurance). When-I-die life insurance needs to be carefully monitored so that policy cash values are kept in good balance with death benefits that are also coordinated with an insuredís health. While this analytical concept is complicated, it couldnít be more important and relevant for the efficient management of when-I-die life insurance policies.